Bounding the Relative Profitability of Price Discrimination

23 Pages Posted: 28 Oct 2003

See all articles by David A. Malueg

David A. Malueg

University of California Riverside

Christopher M. Snyder

Dartmouth College - Department of Economics

Date Written: December 14, 2004

Abstract

We derive bounds on the ratio of a monopolist's profit from third-degree price discrimination to that from uniform pricing. If a monopolist serves N independent markets, demand is continuous, and the cost function is superadditive, then the profit ratio is bounded by N. This bound is tight unless under price discrimination some markets are sold no output or are charged equal prices. The profit ratio can be bounded under more general conditions if the monopolist can ration demand under uniform pricing. We provide examples showing the profit ratio cannot generally be bounded when marginal cost is decreasing, fixed cost is positive, or demand is discontinuous. We extend the analysis to situations in which the monopolist sells several products or sells to distinct markets for which there are heterogeneous transportation costs.

Keywords: third-degree price discrimination, uniform pricing, profit bounds

JEL Classification: D42, L12, L41

Suggested Citation

Malueg, David A. and Snyder, Christopher M., Bounding the Relative Profitability of Price Discrimination (December 14, 2004). Available at SSRN: https://ssrn.com/abstract=443020 or http://dx.doi.org/10.2139/ssrn.443020

David A. Malueg

University of California Riverside ( email )

Economics Department
3136 Sproul Hall
Riverside, CA 92505
United States
951 827 1494 (Phone)

Christopher M. Snyder (Contact Author)

Dartmouth College - Department of Economics ( email )

301 Rockefeller Hall
Hanover, NH 03755
United States
(603) 646-0642 (Phone)
(603) 646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~csnyder/

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